EU Cross Border Fund Distribution Directive and Regulation - Raises More Questions than it Answers?
Harmonisation is a term often bandied around the European Union, however anyone who has even a passing acquaintance with the various marketing rules across the union will know that historically each jurisdiction has had their own particular take on marketing.
One particular area of divergence over the years had been the concept of “pre-marketing.” Some jurisdictions were happy for managers to talk to potential investors, at an extremely high level, about possible funds to gauge interest before setting about the laborious, and expensive, task of establishing the various vehicles. Other jurisdictions took the view that there was no such thing as “pre-marketing” and that all discussions were marketing of some sort and of course, there were a number who sat somewhere in the middle and generally turned a blind eye to that sort of thing.
As discussed in our client alert in 2019, harmony was achieved, or at least flirted with, as the European Parliament adopted the Cross Border Distribution Framework (“CBDF”) Regulation and Directive on the 14 of June 2019. Both were then published in the official journal on 12 of July. Roughly two years later and the CBDF will be applicable from 2 August 2021.
While pre-marketing may have been the area getting most of the attention, there are a few other aspects of the CBDF that managers should be aware of. At the moment the CBDF is applicable only to EU Managers of EU Funds with the decision to extend these rules to non-EU managers residing with each individual jurisdiction.
So what else came in with this?
The CBDF not only addresses some variances for those wishing to market AIFs across the union, but also how UCITS can be distributed. Both UCITS managers and AIFMs will have to make available in each jurisdiction it intends to market “facilities” to perform the following tasks:
- Process subscriptions and redemptions etc;.
- Provide information on how orders referred to in point 1 above can be made and are paid;
- Facilitate handling of information regarding an investor’s rights following investment in the UCITS/AIF;
- Make information and documentation available to investors as mandated under Chapter IX of the UCITS directive and articles 22 and 23 of AIFMD;
- Provide information to investors regarding the tasks the facilities perform and
- Act as a contact point for communicating with the competent authorities.
- These facilities do not have to be established in each jurisdiction, and no jurisdiction will be allowed to require a physical presence in a member state where marketing is occurring on a cross-border basis. The facilities however do need to be provided either in the official language of the member state with the UCITS/AIF is being marketed or in a language approved by the member state’s competent authorities. A third party can be engaged to provide these services, but this third party MUST be subject to the regulations and supervision governing the various tasks.
The CBDF has also introduced a clear mechanism for managers to give notification of their intention to cease marketing funds in various jurisdictions. This has, historically, been something of a grey area as the UCITS regulations and AIFMD, while very clear on how to register for marketing, have been silent on what to do when a fund has had either its final close or the manager does not feel that actively marketing a fund in a jurisdiction will bring in new money.
New clauses will be inserted into the relevant regulations stating that de-notification of marketing in a jurisdiction can be made… with a certain caveat. For UCITS or an open-ended AIF, a blanket offer must be made to repurchase or redeem, free of any charge or deductions, all units/shares etc. held be investors in that member state for at least 30 working days and is addressed individually to all investors in that member state where known. This can be done via any financial intermediaries as well and the intention to terminate arrangements for marketing in that member state must be made by means of a publicly available medium (including electronically) as is customary for marketing that type of Fund.
An added twist for AIFMs is that, for a period of 3 years following denotification, no pre-marketing of the Fund that has been de-registered may be done OR in respect of similar investment strategies or investment ideas.
A quick reminder on how Pre-Marketing works?
Pre-marketing has now been clearly defined and a mechanism will be put in place to allow an AIFM to notify their local regulator of their intention to “pre-market” in certain jurisdictions. This notification should be made within 2 weeks of premarketing starting and include the following information:
- How long pre-marketing is expected to place;
- In which jurisdictions it is expected to take place;
- What strategies are being presented;
- What information is being provided;
- A list of AIFS and compartments being pre-marketed (where applicable).
The local regulator will then inform the other jurisdictions of the intent to do pre-marketing. Documents used as part of the pre-marketing should not be in a form to allow any potential investor to commit to investing (i.e. subscription documents draft or otherwise) or amount to formation documents of a not-established AIF in final form. The documents should clearly state that they do not constitute an offer or invitation to invest in an AIF not should the information therein be relied upon as they are incomplete and subject to change.
As ever, the devil truly is in the detail with this new framework. Whereas the move to, finally, detail what “pre-marketing” actually entails should definitely be welcomed, for established managers the benefits of doing “pre-marketing” may be outweighed by the loss of ability to accept investors via reverse solicitation for a period of 18 months following the end of pre-marketing (to accept investors the fund would have to be fully registered for marketing – thus triggering for AIFs the Annex IV reporting requirements).
Firms would certainly be well advised to carefully evaluate the overall benefits of pre-marketing considering where existing investors are currently domiciled and consider pre-marketing in certain jurisdictions only for maximum effect. Equally, while marketing de-notifications may appear allow firms to draw a line under marketing efforts, consideration will have to be given to expected timing of successor funds or variations on a flagship strategy.
As noted, this applies only to EU managers or EU Funds leaving UK and US Managers at the whims of each jurisdiction as to how the CBDF will be applied to non-EU managers. At the time of writing many jurisdictions have yet to publish their implementation legislation. Germany has passed a bill that will extend the CBDF directive to non-EU AIFMs but a consensus across the continent is yet to be seen. So as harmony is sought, inevitably, an inconsistent implementation is the most likely outcome.
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